China’s Companies Dump U.S. Stock Listings

It has been a banner year for Chinese companies launching initial public offerings in the U.S. But even as the 2010 class of newly listed stocks celebrate a string of strong debuts, other Chinese firms have been reconsidering their decision to list overseas.

Industry professionals say small Chinese companies, frustrated by a sense that their shares are underappreciated in their adopted home, are looking longingly toward China and the higher valuations seemingly on offer in Hong Kong and in the mainland bourses.

Some are even doing something about it.

In recent months the chairmen of Nasdaq Stock Market-listed companies Harbin Electric Inc. and Fushi Copperweld Inc. declared their intentions to take their firms private with the support of private-equity funds. Meanwhile, Chemspec International Ltd. and Tongjitang Chinese Medicines, which have American depositary shares listed on the New York Stock Exchange, said their chairmen have proposed taking the companies private as well.

While it is still early days, market watchers suspect the companies may ultimately list again, possibly in Hong Kong, where the IPO market has just finished a strong year. “We have certainly seen an uptick of this [sort of] inquiry,” says Rocky Lee, a partner with law firm Cadwalader, Wickersham & Taft in Beijing.

Almost 40 Chinese companies listed in the U.S. this year, with Internet companies among the standouts. But for many other Chinese firms, often in more traditional industrial businesses, their U.S.-listed stocks are trading at a significant discount to their counterparts in similar industries in Hong Kong or mainland China, as well as in the U.S. For companies that need to raise capital and are thinking about selling stock, that means they wouldn’t be able to raise as much money in the U.S. as they would elsewhere.

John Ma, director of China research at Roth Capital Partners, a research house that covers small Chinese companies, says the frustration is most acute for those firms that originally listed in the U.S. through a reverse takeover—a process that involves merging with a dormant shell company. The result is that the Chinese company gets a public listing in the U.S. without being subject to the same rigorous disclosures as an IPO.

Bloomberg News

Chinese Internet company Youku.com’s first trading day on the NYSE earlier this month.

But past accounting irregularities and a perceived lack of transparency have weighed on the reputation of companies that listed via a reverse takeover. Last week, The Wall Street Journal reported that the U.S. Securities and Exchange Commission has begun an investigation into reverse takeovers and is targeting individual Chinese companies for accounting violations and lax auditing practices. It isn’t clear which companies are being looked at.

“They’re so frustrated by all the negative publicity surrounding companies that went through a reverse takeover,” Mr. Ma says. “The market doesn’t differentiate between the good and the bad.”

The price/earnings ratio for Fushi Copperweld—which makes wire products—based on Mr. Ma’s forecast of 2011 earnings is 6.2, well below 20.3 for Shanghai-listed Jiangxi Lianchuang Optoelectronic Science & Technology Co. according to data from Thomson One Analytics. Harbin Electric, which makes motors, has a 2011 P/E ratio of 5.6, significantly lower than the 17.2 of Hong Kong-list China Automation Group Ltd. Shanghai-based Mr. Ma covers both U.S.-listed companies and counts Jiangxi Lianchuang and China Automation as their respective peers.

Another Chinese company, Sihuan Pharmaceutical Holdings Group Ltd. listed its shares in Hong Kong in October after having delisted them at the end of last year from the Singapore exchange, where analysts say company valuations have lagged those in Hong Kong in recent years.

The move seems to be paying dividends. Prior to its Hong Kong IPO, Sihuan Pharma sold shares at a price equal to 26.7 times forecast 2011 earnings, considerably higher than the five times expected annual earnings it was trading at in Singapore. The stock closed Friday at 5.63 Hong Kong dollars (72.3 U.S. cents), up 22% from its IPO price.

“Delisting is certainly one way to alleviate [the] frustration [of] small Chinese companies, many of which are excellent companies in China but went to the wrong exchange at the wrong time with the wrong expectations,” CWT’s Mr. Lee says.

If the Chinese companies leave the U.S. and relist, it is likely to be Hong Kong that benefits most. Foreign companies still aren’t allowed to list on China’s domestic exchanges. That category includes overseas-listed Chinese firms that restructured into offshore entities, even though their operations and assets are predominantly in mainland China.

Beijing has signaled its intention to set up an international board in Shanghai, which may open the way for Chinese firms to come home. The international board would allow companies to sell stock directly in yuan, rather than raise funds in a foreign currency and then negotiate with the foreign-exchange regulator to bring them into the country. But it is unclear when that might happen.

Companies leaving the U.S. for a venue closer to home also may not have much time. Some poor debuts and pulled offerings have raised questions as to how long the IPO rush will last.

And in some ways, local results still pale in comparison to what a Chinese company can reap in the U.S. Youku.com Inc. more than doubled on its first day of trading on the New York Stock Exchange this month.

Comments (3 of 3)

FSIN
Fushi Copperweld's owner bid $11.50 for the buyout yet the stock has plunged to under $9. One has to question the sincerity of the bid, since they could be buying up stock for far less than $11.50 but don't seem to be doing so.

1:33 pm December 27, 2010

Makes one wonder doesn't (*IT)... International Trage Greed, The OZ... wrote :

Fred... will the same be true for small- to mid-cap companies that are located in Tiwan and other off Hong Kong Shores that are now listed on London and Wall Street? Ya' Think... thats what's carrying on the WTO, Carry Trade and Obomba's Mad-Hatter Bums Rush to sign up every one of them whith their $ to leveitate our US $ of of this depression / recession? We are going nowhere vesry fast now... except futhure in US National Debt! You... THINK!

11:44 am December 27, 2010

Fred wrote :

Another great example of this nascent trend is West China Cement. Listed in London, the shares traded at a low PE despite the company's strong growth, and excellent prospects. In August 2010, the company started trading in Hong Kong and simultaneously delisted from London. The CEO said at the time that "the English just don't understand China." The stock has tripled since then, and the company sold newly issued shares and convertible bonds in HK to fund its future growth.

The cost of capital for legitimate small- to mid-cap Chinese companies listed in the U.S. is far too high. They would be well-advised to seriously consider moving their listing to Hong Kong.

Thanks for reading Deal Journal. We would like to direct you to MoneyBeat, the Wall Street Journal’s brand new global blog. MoneyBeat unites MarketBeat, The Source, Overheard and all the Deal Journal blogs, bringing together all the market, M&A, IPO and hedge-fund news from those blogs into a 24-hour hub for finance news. Check it out and let us know what you think at moneyblog@wsj.com.

About Deal Journal

Deal Journal is an up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street, including mergers and acquisitions, capital-raising, private equity and bankruptcy. In short, wherever money changes hands. Deal Journal is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s David Benoit is the lead writer, with contributions from other Journal reporters and editors. Send news items, comments and questions to deals@wsj.com.